Wednesday, June 27, 2012

Here Come the Bankrupt Cities

This morning’s news brings several reminders that, in many ways, the global financial situation is still getting worse. As I write this, CNBC’s front page is showing two front-page headlines that hint at giant bank failures. I have not seen that before. There are new questions about how long auto maker Opel can keep operating.

And then there is the announcement of a large municipal bankruptcy in Stockton, California. This bankruptcy filing may come tomorrow. Stockton is a city of 300,000, so its bankruptcy dwarfs the de facto bankruptcy of Harrisburg, Pennsylvania.

Harrisburg, for its part, has no money to pay its bondholders and cannot fully pay its suppliers. It is being temporarily kept out of bankruptcy only by a legal fiction enacted last year by the state, but that law may not survive a series of court challenges by creditors.

A much larger city, Detroit, appears to be headed down that same path, just two or three years behind Harrisburg.

June 30 is the end of the fiscal year for many government units, so it will be a surprise if there are not several additional municipal bankruptcies filed in the coming days. The trend of municipal bankruptcies will continue for the next several years, as there are no easy answers for economically hard-hit cities when the whole global economy is struggling.